The United States, and particularly the U.S. Gulf Coast, is the deepest and most liquid natural gas market in the world with a dense pipeline network and multiple supply sources, which makes most players globally in the LNG industry comfortable with buying volumes from the U.S. Gulf Coast.

A new market study by Wood Mackenzie on “U.S. LNG Exports: What Will Constrain Supply To Pacific Markets?” pointed to the current 15.4 billion cubic feet per day (bcf/d) of LNG export capacity from five brownfield and three Greenfield projects, noting that increasingly, the export licenses and other aspects of the approval processes are becoming politicized.

While non-FTA export approvals are important, other factors could determine how much LNG will ultimately be exported from the U.S., the company emphasized.

“For projects able to deliver in the short window before 2018, U.S. LNG exports into the Pacific, in particular, could feature payback periods of less than five years. U.S. LNG projects able to move quickly enjoy significant first-mover advantages,” explained Noel Tomnay, head, global gas research, Wood Mackenzie. “However, overall capacity build will likely be constrained by the speed at which liquefaction facilities can be developed to meet this window with their progress slowed by environmental and regulatory hurdles.”

“Given these hurdles US LNG exports are likely to be under 3.5 bcf/d in the timeframe to 2018, less than the 4.0 to 12 bcf/d envisaged by the Energy Information Administration in its rapid and slow ramp-up scenarios,” he continued.

Wood Mackenzie stated that in the last four months, BG Group, Gas Natural Fenosa, Korea Gas Corp. and GAIL signed offtake agreements for 2.1 bcf/d of LNG from Cheniere Energy’s proposed Sabine Pass liquefaction facility. The Sabine Pass project is the only liquefaction facility so far approved by the U.S. Dept. of Energy (DOE) for exports to non-free-trade-agreement (non-FTA) countries. However, the facility has yet to receive approval from the Federal Energy Regulatory Commission.

Higher-cost U.S. liquefaction developments in combination with an expectation of higher Henry Hub gas prices will likely make proximate Pacific supply options more competitive. Consequently. Wood Mackenzie predicts that post-2018 incremental U.S. LNG exports into Asia are likely to be restricted by competition and buyer appetite rather than export approvals.

According to Tomnay, “Export licenses for non-FTA countries could be determined by proposed projects’ place in the filing queue with those that submitted early better positioned, particularly if a cap is imposed. This could result in capacity being approved that may not be the most technically or commercially viable, possibly restricting the pace of capacity building further.”

The analysis also notes that relatively low costs for re-developing existing regasification facilities make LNG exports from brownfield U.S. facilities inexpensive relative to other proposed liquefaction, including that from Canada, noted Amber McCullagh, senior analyst of North American gas research, Wood Mackenzie.

“While brownfield projects are expected to be lower cost than greenfield facilities, not all brownfield sites are created equal. The best brownfield sites can be redeveloped into liquefaction at levelized costs of $2.50 per million Btu. But, sites with environmental restrictions, site limitations or infrastructure constraints exacerbated by the rights of existing regasification capacity holders, look likely to face higher costs," she added.

In looking at the proposed LNG export projects in Canada, Asish Mohanty, senior analyst, global LNG-Americas, Wood Mackenzie, told Hart Energy’s E&P Online, “We haven’t specifically done this analysis on the Canadian west coast exports. However, whether gas goes out of the Canadian west coast or the U.S. Gulf Coast, gas is going to exit North America.”

“The reason I am saying this is because if, for example, some of these projects in the U.S. are delayed due to regulatory uncertainty as seems to be the case right now, then that is going to play into the hands of west coast Canadian projects,” he stated.

The Canadian proposals are greenfield projects, hence have a higher cost and will take longer to construct than the U.S. Gulf Coast projects.

“The basis differential for gas in Canada is forecast to be lower than basis differential on the U.S. Gulf Coast. Getting gas for LNG projects is going to be lower cost for Canada. However, the issue with Canada is that there are higher costs involved in developing those projects because there are higher pipeline and liquefaction costs,” Mohanty explained.

Custom pipelines will need to be built from the Canadian shale plays to Kitimat or Prince Rupert on Canada’s west coast. “These are going to be passing through pretty difficult terrain and that increases the capital cost. Also, if and when liquefaction plants are built in Canada, those capital costs are going to be higher than those built on the U.S. Gulf Coast since these are remote locations and there is very little existing infrastructure,” he emphasized.

Mohanty reiterated that the intent of the report was not to compare U.S. and Canadian projects. “Suffice it to say, overall, we expect the U.S. projects to be lower in terms of cost. But, the other side of the coin is that if there is greater and greater regulatory uncertainty as we see now, there probably might be people moving into the Canadian projects because the export license there can be more easily obtained.”

Hart Energy E&P Online asked Mohanty how a Gulf Coast plant would be able to maintain steady output without a long-term supply contract.

“That is a good question,” he replied, “because liquefaction projects around the world historically have dedicated gas supply from a dedicated field or set of fields. That provides a lot of comfort for players all along the chain. Most liquefaction projects in the world have been developed that way.

“However, in the case of the U.S., it is going to be different, and the reason is because the U.S. is the deepest, biggest and most liquid market in the world. The U.S. Gulf Coast has good supply sources including potential unconventional supply sources like the Haynesville, Eagle Ford and Bossier.

“Around the Gulf Coast, there is both ample gas supply and ample pipeline capacity available. The reason these are important is because even if one of these areas doesn’t provide sufficient volumes, projects can easily get replacement gas from somewhere else,” he emphasized.

“As you can see from buyers that have started to sign up from these projects, they are clearly comfortable with the fact that there is going to be ample, reliable long-term LNG supply from the U.S. Gulf Coast,” he added.